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Comment by berberous | Hacker News Reader

I don’t really see why it’s his fault investors over valued his company — he believed in his own spin and was phenomenally successful at building a large, real business. This was not like Theranos where he was straight up lying about a product working — anyone could analyze the business based on the fundamentals, and investors seemed ever willing to invest at high valuations.

The self dealing was reprehensible and evidence of low morals in my view, but none of those events actually materially impact the value of the business. Instead, overnight, investors just came to their senses about what kind of value this type of business is worth. Definitely a strategic misstep on his part, but it’s not like he stole billions of value away from the company. The drop in value is more like what happened to Uber or Blue Apron post IPO, except, unfortunately for the employees, it happened before they could exit.

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> was phenomenally successful at building a large, real business

What? How? He built an 8b business with 16b in investment. Anyone can do that. Take 16b, put it in index funds, call yourself an investment bank. You'd get better returns than -50%, for sure.

Not just anyone gets 16b of funding to lose 50% on it. You need to be a very charismatic CEO - maybe borderline cult-leader status

and there you have hit the nail on the head

I think you also need some "special" investors. In this case softbank appreciated the crazyness of the CEO.

Yes, but don't forget that those "special" investors were funded by even richer, special-er investors.

Softbank funded WeWork via the Vision fund, which is primarily funded with Saudi money.

Right but we're assessing the quality of the business he built. It's crap. That doesn't change with what the parent said.

ANYONE can lose that kind of money - that's the point they were getting at.

No need to be pedantic.

I'd love to see you try. It's easy to turn $20 into $40, but as you approach larger numbers it keeps getting harder.

Looks like you've got it backward - as long as your $16b doesn't turn into $8b (negative fifty percent), you're doing better than this guy. If you put the $16b in any kind of mutual find, you're going to get a positive return, even if it's a single digit percentage, and it'll be much better than this guy.

Overall I agree with the point, but I was considering the idea of risk and the stock market, and I looked at what kind of return you would get if you invested in a major index at a peak and sold at the low point, and historically it's been in the ballpark of -70%.

So the odds are lower and the timescale is longer, but you could still lose more, potentially.

The issue i have with all these arguments is that while you can turn x into 2x, when you layer on interest, taxes, and any fees you encounter in the process...your cut won’t be what you thought it was going to be. Making money isn’t cheap and anyone who thinks it is hasn’t actually tried to do it yet.

That's a negative 70% in the worst case. I wasn't talking about making 70%.

He's saying you can do better than turning $40 into $20 at scale. He's not saying he will double the investment - only that he won't lose half of it.

Completely untrue. Even if all you do is take advantage of the investment opportunities that someone with, say, a million dollars get access to that someone with 20 doesn't, it's easy to grow large amounts of money.

"To turn $100 into $110 is work. To turn 100 million into $110 million is inevitable". Edgar Bronfman

So you have a good argument, but that basically means all that stands between someone making $10million is getting the credit to start their business? I’d love to offer you that credit and take half your profits after interest and taxes.

No, I said no such thing, and borrowing money is different than having money.

I guess I just don't know what you're saying then. It's easy to make money if you already have it? Maybe in terms of quantity, but in terms of % return i don't feel the ease of producing a return is really super linear or logical.

Or as Matt Levine might say, take the $16b, light half of it on fire, and put the other half under your mattress. Boom: You've just beaten negative interest rates.

Ah yes, "if it's legal, it's not his fault." It's not "his fault" for the gross incompetence that lead to this outcome? Whose was it? I would suggest that it is in fact "his fault," but why would he ever have cared? He lacked any incentive to fret any potential negative outcomes for the business, since after a point he had assured that they all ended in him being astronomically wealthy regardless.

This sort of thing sends ripples across peoples' lives. Normal people (outside of the idle rich who can afford to waste money on speculation with effectively no consequences) do lose out when things like this blow up.

The lack of regulation and legal accountability here is shocking. The fact that regulation doesn't currently exist shouldn't be used as a justification for excusing the behavior of bad actors!

The investors. If you give a loose cannon many billions of dollars, who is at fault?

But yes, normal employees are paying the price here.

The investors also paid a hefty price. The only person getting out of this scot-free is Adam.

He’s getting punished too. He thought he was going to be the first ruler of the entire world, and now that dream is (probably) dashed.

> I don’t really see why it’s his fault investors over valued his company

> he believed in his own spin

It's his fault because he accepted the price for his business! He was in numerous conversations where people wanted to invest in WoWork and he told them that the valuations they were investing at were not just reasonable, but under the real market price - which is why venture buys into companies.

> none of those events actually materially impact the value of the business

> overnight, investors just came to their senses about what kind of value this type of business is worth

These things seem like they contradict each other. If Neumann's actions are not material, why did his removal reveal the true value of the company? Material just means it changes the value of the company. There are lots of "material" events that don't have anything to do with business fundamentals.

I refuse to believe anyone wouldn't take 1.7 billion to walk away from a company.

Not before paying, I don't know, something like 10-20 million to have the deal and everything else made watertight and 110% legal. Other that, you cannot blame him for the 1.7 billion. For the way how he got them he can be blamed so, IMHO.

I think it's unlikely that Adam would be liable for having accepted an inflated valuation. Courts typically give management pretty wide latitude to make business decisions as along as they can give some plausible explanation. It's called the "business judgment rule" in corporate law and gives the company quite a bit of deference[0]. It derives from Delaware General Corporate Law § 141(a), then gets carved out through case law.

That said, there are a few ways to overcome it. Self-dealing is one way, assuming Adam didn't disclose the transactions. Fraud would be another.

All this stuff is pretty fact-specific. We can guess, but there's a lot we won't know until it gets litigated.

[0] https://en.wikipedia.org/wiki/Business_judgment_rule

>It's his fault because he accepted the price for his business! He was in numerous conversations where people wanted to invest in WoWork and he told them that the valuations they were investing at were not just reasonable, but under the real market price - which is why venture buys into companies.

What? It's his fault that he was able to hoodwink all these amazingly smart venture capital owners into investing?

No. What happened was some venture capital owners made a bet that they could find a bigger sucker to dump their shares on. But that bet went sideways. Nothing more. There is no indication of any fraud yet. Just some people that thought an eccentric personality could help them ride the wave of funding.

Everybody will always sell their business for as much as they can. It's unreasonable and not helpful to expect otherwise.

VC-s as a rule of thumb do due diligence before investing. They didn't throw money at him on the whim. They examined the books and everything else you could think of (or should have done so).

Unless he was cooking the books or conned some other way - you may say he is the one scumbag to rule them all if you like for walking with fuck you money squared while his employees get the shaft, but he did nothing wrong in pitching high valuations that the others side accepted.

> ...he believed in his own spin and was phenomenally successful at building a large, real business.

Successful at building a large, real business selling $10 bills for $8. It's a dreadful business, they lose money hand over fist with no path to stopping the bleeding.

For a while now, any company who could claim to be a "tech" company like WeWork (an objectively real estate company) did was able to raise on terms that are only suitable for zero-marginal-cost businesses. That is unlikely to continue.

Doesn't have to be necessarily a bad thing if you ask me.

Oh no, I'm actually glad.

There's a case to be made that the benefit of a recession is that it kills off these types of wildly unsustainable businesses as they're forced to prove their model. It's been over a decade since the last one. This allows us to remove some of the froth from the market without necessarily going through the same level of hardship en route.

> selling $10 bills for $8.

The classic "We lose money on every sale, but make it up in volume" approach.

A neat spin on it actually! "We lose money on every sale and we have no idea how we'll ever stop, but let's do a lot of it anyways."

I was under the impression it wasn't even a real estate company since it only rented it's properties and then sublet them.

It didn't even buy properties.

> phenomenally successful at building a large, real business.

That's like saying the Soviet Union was successful at building a strong consumer economy. Anything can look good when you're able to under-price your services using someone else's money.

>"he believed in his own spin and was phenomenally successful at building a large, real business.'

How was he "phenomenally successful" if the company needed an emergency bailout because they were about to run out of cash?

> I don’t really see why it’s his fault investors over valued his company ... This was not like Theranos where he was straight up lying about a product working

Hell of a low bar you're setting.

Self dealing is fraudulent. It sends a message to con-artists of the future to do exactly what Neumann did for a potential big payout.

Agreed. This is the direct and intended result of a society which values those with money (investors) over those without money (people who invest their time, talent and effort).

He did nothing wrong in this society, so maybe we ought to fucking change society.

That seems like an odd statement, considering that to participate in WeWork, employees got paid, customers got subsidized, and investors (Saudis, I guess) got charged vast amounts to no benefit for them. Nothing about it suggests valuing investors, but the opposite.

Just one small comment -- instead of investors, it was mostly Masayoshi Son at SoftBank that was pumping capital into WeWork and each round invested pumped up the valuation as well, so never had to face any reality from other investors, but it all came to a head in the prospectus for the IPO.

I think Galloway explains it well in this video -- https://www.youtube.com/watch?v=3UdhLWGrtDI

Wait, did he not use company funds to buy real estate in his own name and then lease them back to the company? That is still not illegal but super shady. You cannot paper over things with "investors overvalued it" logic. He went to extra lengths to make his cheating legal.

Did not know about that, do you have a source on that?

> The self dealing was reprehensible and evidence of low morals in my view, but none of those events actually materially impact the value of the business.

Materially WeWork is a real estate company selling itself as a tech company to get a higher valuation. Sure, it's expected that founders don't have a realistic idea of what their company is worth, investors should have done more research. But Neumann's ethical failings in regards to self-dealing is closely related to failing to accurately represent the state of his business. I think Neumann is fully responsible for WeWork's overvaluation, even if he fully believed his own spin.

Unless Neumann presented fraudulent numbers, then the buyer is responsible for valuing what they buy.

Sellers don't get to dictate what something is worth.

I'm not arguing that Neumann's actions meet the legal definition of fraud. I'm arguing that he has a moral responsibility. Investors are responsible for believing Neumann. But I think that if he had been an ethical person who did not self-deal, WeWork might not have been over valued so much. I think self-dealing and dishonestly representing your company's worth is related.

The self dealing was not hidden, so I am perplexed why one would think a company with self dealing is worth more than a company without self dealing.

Neumann, as a seller, went out into the market and found some buyers. A seller sells for the most they can, and the buyer buys for the least they can. Except in this case, the buyer wanted to flip it, so the buyer wanted to over value it, so that they could claim it was worth even more (due to the rate of increase in "valuations") when they try to IPO it.

If anyone was lacking in morals, it would be the buyer who intentionally paid more than they knew they would if their aim was to hold onto it as a business, just so they could pawn it off onto someone else who didn't know better.

> This was not like Theranos where he was straight up lying about a product working

She.

He.

He's talking about the WeWork guy, not the theranos woman. I think it's a strange sentence, but technically correct.

Ah. I stand corrected. Thank you.

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